Every economist and financial sector analyst has been busy discussing the 11th\u00a0letter in the English alphabet ahead of the February Budget \u2013 K.<\/p>\n
The focus is on the K-shaped, or two-speed, recovery.\u00a0While\u00a0<\/strong>corporate profitability, record exports, flow of foreign direct investment and a buoyant stock market (till recently) signal the benefits that the affluent income class and industries have been enjoying,\u00a0there is\u00a0<\/strong>no end to the sufferings of the lowly paid workers, farmers, and small and medium businesses.<\/p>\n Everyone wants Finance Minister Nirmala Sitharaman to address this in her Budget\u00a0tomorrow. Apart from an ambitious ~6 trillion asset monetisation plan over four years between FY22 and FY25, and a ~1.02 trillion national infrastructure pipeline to be built in five years by FY25 (announced by Prime Minister Narendra Modi in his 2019\u00a0Independence Day speech), her last Budget earned kudos for accounting transparency and junking the practice of concealing the reality of fiscal deficit by showing the Food Corporation of India\u2019s dues below the line. The primary reason behind the rise in fiscal deficit is correcting this anomaly, more than the spending to fight the Covid pandemic.<\/p>\n As a bonus, the last Budget also promised a slew of reforms, including redefining small and medium enterprises, the privatisation of two public sector banks and taking Life Insurance Corporation (LIC) to public, among others.<\/p>\n How many such plans have translated into action?\u00a0There are signs of recovery in different segments but how many promises have been kept? Will the\u00a0finance minister\u2019s predicament be:<\/p>\n The signs of recovery are lovely, bright and deep,<\/em><\/p>\n Still I have many promises to keep,\u00a0\u00a0\u00a0<\/em><\/p>\n And miles to go before I sleep,\u00a0\u00a0\u00a0<\/em><\/p>\n And miles to go before I sleep.<\/em><\/p>\n (With due apology to Robert Frost)<\/em><\/strong><\/p>\n Let\u2019s focus on some key data.<\/p>\n Going by the first advance estimates of the National Statistical Office, the Indian economy is expected to grow at 9.2 per cent in FY22, after contracting 7.3 per cent in FY21. Since the economy grew at 13.7 per cent in the first half (April-September) of FY22, clearly, it is losing momentum in the second. This is logical because of the base effect.<\/p>\n The Reserve Bank of India (RBI) has estimated the growth at 9.5 per cent in the current year. The International Monetary Fund (IMF) has cut the growth forecast to 9 per cent from 9.5 per cent, projected in October. The World Bank\u2019s Global Economic Prospects report, released on January 11, has projected growth for the year even lower \u2013 8.3 per cent, unchanged from the last projection in October 2021. Both IMF and World Bank, however,\u00a0are bullish\u00a0<\/strong>on the Indian economy\u2019s growth estimates for FY23.<\/p>\n The last Budget had estimated the fiscal deficit for the current year at 6.8 per cent of GDP.\u00a0It can be achieved. The revenue projections for FY22 were\u00a0conservative.\u00a0In fact,\u00a0<\/strong>the gross tax projections in the Budget were not even 17 per cent. And, despite the recent cut, the excise duty collected from petrol has been quite high. The combination of the two should cushion the deficit projection well even though most of the privatisation and divestment programme is unlikely to materialise.<\/p>\n In the best case scenario, the privatisation of two banks can happen next year. The story of IDBI Bank\u00a0Ltd, Bharat Petroleum Corporation Ltd and general insurance companies is no different.\u00a0We are celebrating Air India\u2019s privatisation but this has translated more to cutting losses than\u00a0making money. In the best case scenario, the government may get around ~3,000 crore from this deal.<\/p>\n The big elephant in the room is LIC. Every effort is on for its initial public offer (IPO). If that happens \u2013 and it probably can \u2013 the FY22 fiscal deficit could be less than the estimated 6.8 per cent, probably around 6.5 per cent. Even if the IPO doesn\u2019t materialise, the deficit figure won\u2019t be widely off the mark \u2013 between 6.5 per cent and 6.9 per cent.<\/p>\n Shall we see a firm fiscal consolidation path for FY23? No, but the deficit will certainly be less than the current fiscal\u2019s. In the best case scenario, it can be below 6 per cent. Analyst estimates vary between 5.8 per cent and 6.3 per cent.<\/p>\n That brings us to the next important data point: The amount of the government borrowing programme. In the current fiscal year, net borrowing has been ~9 trillion\u00a0\u2013 slightly lower than the budgeted ~9.4 trillion \u2013 and it will be achieved.\u00a0This is despite the government absorbing ~1.59 trillion goods and services tax (GST) compensation transferred to states within its scheduled borrowing calendar.<\/p>\n For the next fiscal year, the gross borrowing programme is expected to be ~12.25 to ~13.25 trillion.\u00a0Assuming\u00a0<\/strong>the government conducts a few switch operations\u00a0\u2013 a mechanism through which it\u00a0replaces existing shorter duration sovereign securities with long-term papers \u2013\u00a0the net borrowing programme could be around the same level as in FY22 or marginally lower.<\/p>\n What about\u00a0the\u00a0<\/strong>state government borrowings? In the current year, it\u2019s around\u00a0~7.7 trillion. Theoretically, it can rise as the compensation agreement for any shortfall in the GST between the Centre and the states ends in June 2022.\u00a0From July, the Centre is under no obligation to take care of the shortfall for states. But it has not yet cleared all its dues and hence the arrangement could continue beyond June to deal with the residual dues to states. So, there may not be much change in the states\u2019 borrowing programme.<\/p>\n The rationalisation of the GST structure has long been pending but that\u2019s a different issue. There is scope for smart manoeuvring here. For instance, of the four slabs, two \u2013 of 12 per cent and 18 per cent \u2013 can be clubbed into one. This will reduce the slabs but lead to higher effective tax yield. Currently, around\u00a0500 services and at least 1,300 products fall under four major GST slabs.<\/p>\n Will it be easy for the RBI to manage the borrowing programme? Won\u2019t that crowd out corporate and retail demand for credit? So far, it hasn\u2019t\u00a0done so\u00a0since the credit demand has been tepid. But bankers have started seeing signs of corporate demand for credit. This is why efforts are on to get\u00a0India into the global bond indices.<\/p>\n Its\u00a0inclusion in such indices will lead to the flow of foreign money into the bond market, lifting their prices and lowering the borrowing cost of the government. This will also have a positive impact on the stock market, corporate bonds and local currency.<\/p>\n The RBI wasn\u2019t too keen on this as any serious geopolitical event could blow off the risk premiums but the\u00a0Indian\u00a0central bank seems to be softening its stance.<\/strong>\u00a0Preparing the ground, the 2020 Budget had announced allowing foreign investors to buy unlimited amounts of select government bonds via\u00a0the fully accessible route,\u00a0or FAR.\u00a0The contentious issue is taxation. The Euroclear platform can take care of the settlements of bond buying by international entities but how will the taxation issue be settled?\u00a0Can we have two sets of taxes \u2013 capital gains and withholding tax? Serious efforts are on to sort this out.<\/p>\n A week after the Budget, the RBI will announce its last monetary policy of\u00a0FY22\u00a0against the backdrop of the US Federal Reserve, in its battle to tame inflation, set it to increase interest rates in March and ending its bond purchase programme. Let\u2019s discuss that next Monday.<\/p>\n","protected":false},"excerpt":{"rendered":" Every economist and financial sector analyst has been busy discussing the 11th\u00a0letter in the English alphabet ahead of the February Budget \u2013 K. The focus…<\/p>\n","protected":false},"author":1,"featured_media":3171,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-3170","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles"],"acf":[],"_links":{"self":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3170","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/comments?post=3170"}],"version-history":[{"count":1,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3170\/revisions"}],"predecessor-version":[{"id":3172,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/posts\/3170\/revisions\/3172"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media\/3171"}],"wp:attachment":[{"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/media?parent=3170"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/categories?post=3170"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bankerstrust.in\/column\/wp-json\/wp\/v2\/tags?post=3170"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}